Economic Incentives to Increase Public Transport Patronage – The Theory and the Practice

Abstract

This paper reports on an innovative policy for central government funding to local passenger transport services in New Zealand, that ties funding directly to performance. The new policy, known as Patronage Funding, was developed and implemented by Transfund New Zealand, with assistance from consultants. Under the policy, government funding to the regions for public transport services is based directly on the patronage generated. This leaves responsibility for service planning with regional government, but encourages them to improve services in such a way as to generate additional patronage. The payment rates are based on estimates of both the user benefits and externality benefits of improving services and hence attracting additional passengers. The externality component comprises benefits associated with reduced road congestion, safety and environmental benefits. Hence, the payment rates vary by city, time period (peak/off-peak) and distance travelled. The paper describes the economic theory and the analyses underlying the new policy, key aspects of its implementation, and experience in the first six months since its introduction in November 2000.